A mammoth year for venture capital

Venture capitalists were busy in Washington state last year, pumping $1.3 billion into 170 deals.

That’s the largest total since the boom years of 1999 and 2000 and the third biggest haul since PricewaterhouseCoopers and the National Venture Capital Association started tracking venture investments in 1995. It also represented a 20 percent increase in deals and a 31 percent increase in dollars over last year, which was a blockbuster period itself, with $1 billion invested in the state.

Source: MoneyTree

Nationally, venture capital investments hit the highest level in six years, as $29.4 billion flowed into 3,813 deals.

But with the stock market swooning and economists discussing the possibility of a recession, are dark clouds on the horizon?

At least a few of the leaders in Washington’s startup community think the region is on solid ground.

“We’ve been talking about if a recession is coming and what it means for venture,” said Tom Alberg, a founding partner of Seattle’s Madrona Venture Group. “It doesn’t really impact the creation of startups. It is really in the exits.”

Matt McIlwain, also a partner at Madrona, said that 2007 was an exceptionally good year for mergers and acquisitions of venture-backed companies. And though only two Washington companies made it onto Nasdaq last year, he said the initial public offering market started to improve.

MoneyTree

“Macro factors such as a stock market downturn or tightening corporate budgets could dampen the exit environment in 2008, but I expect that quality companies in good market sectors will continue to be bought at a healthy pace,” said McIlwain, whose firm backed early-stage Seattle startups AdReady, Apptio and Apollo Mobile Media during the fourth quarter.

Madrona plans to do about four to six new investments this year, with McIlwain saying that he believes Washington state is well positioned to be the third most important venture market in the country behind Silicon Valley and Boston.

In fact, Washington state ranked fourth in both dollars and deals in 2007. Meanwhile, Oregon companies raised $301 million last year, while four Idaho startups attracted $16 million.

There are some areas of the venture industry that are absolutely on fire, primarily in clean tech, life sciences and Internet.

Clean tech, which includes biofuel, solar and other alternative energy companies, and life sciences, which includes biotechnology and medical device companies, each had record investment totals in 2007, according to the MoneyTree report.

Nationally, clean tech companies received $2.2 billion last year — more than quadruple the investment level in 2005. Life science companies attracted $9.1 billion, making it the biggest investment sector for venture capital last year.

Meanwhile, Internet companies attracted 16 percent of all venture capital, with $4.6 billion invested. That was up 12 percent over last year.

In Washington state, software remained king. Thirty-nine software companies attracted $265 million, down slightly from 2006, when $283 million was invested.

Biotechnology companies in the state also had a good year, with $253 million invested in 25 deals. That was the second biggest year on record behind 2000, when $310 million flowed into the sector.

The areas of energy/industrial, networking/equipment, media/entertainment, semiconductors and telecommunications also saw sizable gains in investment dollars last year. On the flip side, fewer dollars were invested in medical devices and health care services companies.

Kirk Van Alstyne, a managing partner at Evolution Capital Advisors, a Seattle investment bank that serves startup companies, said that deal flow is strong and venture capitalists are busy working on new companies.

“I don’t think there is going to be a precipitous fall in 2008,” said Van Alstyne, whose firm helped raise money for Powerit Holdings, Treemo and M2E Power last year. “There is a lot of money out there and they need to deploy those funds.”

Evolution Capital’s Troy Hartzell said some areas are overheating, including the Internet industry, where multiple startups are attempting to solve the same problem. It has gotten to the point where some investors are no longer looking at deals in areas such as social networking.

“The Valley has seen them all,” said Hartzell. “Unless you can crisply differentiate, it is going to be very difficult to raise money.”

Clean tech also has elements of a frothy market, he said.

But, overall, Van Alstyne and Hartzell are confident in what they are seeing with new entrepreneurial ventures being formed and mergers and acquisitions continuing at a decent pace.

“The startup community was decimated after the dot-com bust and it has taken a while to build it back up again,” said Van Alstyne.

Hartzell agreed, adding that both angel investors and venture capitalists are busy at work on new ideas.

“It has been so healthy with (so many) companies that have sprouted up again,” he said. “The entrepreneurial atmosphere in the city is really charged.”

Q4 INVESTMENTS IN WASHINGTON STATE*

AdReady, IT Services, $9.9 million

Adapx, computers and peripherals, $11.1 million

Allozyne, biotechnology, $18 million

Apollo Mobile, consumer products, $1.2 million

Apptio, software, 6.9 million

Azaleos, software, $10.4 million

Calistoga Pharmaceuticals, biotechnology, $15.7 million

Car Advisory Network, networking and equipment, $6.2 million

Carbon Nanoprobes, biotechnology, $855,000

Cardiac Dimensions, medical devices, $35.4 million

ClearAccess, networking and equipment, $1.6 million

Confirma, software, $14.8 million

CultureMob, media and entertainment, $800,000

Dexterra, software, $2.2 million

Ekos, medical devices, $350,000

ExtraHop Networks, networking and equipment, $1.5 million

Fyreball, telecommunications, $800,000

GridNetworks, telecommunications, $9.5 million

Hidden City Games, media and entertainment, $15 million

Illumigen Biosciences, biotechnology, $957,000

Impinj, semiconductors, $4.2 million

Inrix, retailing/distribution, $15 million

Insitu, industrial/energy, $25 million

Justin.tv, media and entertainment, NA

Koronis Pharmaceuticals, biotechnology, $3.1 million

LiveMocha, media and entertainment, $5.9 million

M:Metrics, telecommunications, $1 million

MedManage Systems, biotechnology, $5 million

Melodeo, media and entertainment, $2 million

Mercent, IT Services, $6 million

Optimum Energy, industrial/energy, $5 million

Pulsar Vascular, medical devices, $1.9 million

RadioFrame Networks, telecommunications, $8.3 million

Resolute Solutions, business products and services, $3.9 million

SEOmoz, software, $1.1 million

Smilebox, software, $7 million

Smooth, industrial/energy, $3.9 million

TIOTI, media and entertainment, $52,000

Tamarac, software, $7.1 million

TTM, telecommunications, $54.9 million

UBmatrix, software, $60,000

Ultreo, medical devices, $18.3 million

Vantos, software, $2.5 million

WildTangent, media and entertainment, NA

*Note: The MoneyTree Report tracks funding as dollars arrive to companies, so some figures may be different than previously reported on this blog.